Jersey City Privatizes Water Department

Alexander VolokhPrivatization Watch, July 1996

Under the leadership of Mayor Bret Schundler, in early May, Jersey City
completed its first large-scale privatization; the city contracted out the
management of its municipal Water Department, which serves 250,000 customers.

Bidding for the water contract was highly competitive. All six bidders offered
to run the water system at a lower cost than the cityís current operation. The
winner bidder was the United Water Company, which will be responsible for
everything "from soup to nuts," says Dan Mahony, assistant to Mayor Bret
Schundler -- everything from the aqueducts and pipes to the billing and bill
collection.

The city will save 35 percent from contracting out water operations. In the
first year costs will drop from $9 million to $5.9 million (plus a variable
power fee estimated at $440,000). Costs will rise slightly each year thereafter
to compensate for inflation.

The city is also expected to benefit from substantial increases in bill
collection revenues. Currently, the city's system is so antiquated that itís
impossible to look up people's water bills on the phone in real time. Reason:
all records are kept on three-by-five cards. United Water will computerize the
billing system.

Moreover, only 66 percent of the water now produced by the city is ever actually
paid for due to leakage and "non-metered uses" -- fire hydrants or outright
theft. The contract provides financial incentives for United Water to increase
this percentage:

If the percentage rises to 70 to 75 percent, United Water gets to keep 5
percent of the increased collections.

From 75 to 80 percent, United Water keeps 10 percent of the increase in
collections (over what they would be at a 70 percent rate).

If the collection rate exceeds 80 percent, this percentage rises to 25
percent of the increase in collections.

With these incentives, the city expects the collection rate to rise to about 80
percent.

Substantial overall five-year savings and revenue increases are expected from
the privatization. These are broken down as follows:

$17.5 million in operational savings;

$2.5 million for the one-time concession fee;

$16.9 million in increased water collection; and

$31.7 million in increased sewage collection (which will continue to be run
by the city, but which, by regulation, is 1.73 times the water bill).

Water rates will be unaffected by the privatization and all 138 employees of the
department are guaranteed their jobs for at least a year. After that, the
number of employees can be reduced, but to no fewer than 80 (the number of
employees United Water estimated it would need in its bid).